Airlines do not want Heathrow to have control of building a 3rd runway – perhaps a “Buildco” instead?

Date added: June 4, 2018

British Airways and other airlines are hoping to take over building the possible 3rd Heathrow runway from the airport’s owner, because they do not want costs to escalate. They do not think the government or CAA has enough control over Heathrow to ensure it controls the costs of the massive expansion project. Passenger charges and investor returns are based on the total value of Heathrow’s assets, (RAB) and this gives the perverse incentive for the airport not to keep its spending low. The more it spends, the more its owners can earn. An investigation by The Sunday Times in March highlighted widespread concerns over Heathrow’s bloated spending. Willie Walsh (CEO of IAG) told the Transport Committee’s inquiry in February that he had “zero” confidence that Heathrow’s operating company would deliver the project on time and on budget. He said it would be foolish to sign a “blank cheque”. To try to calm the airlines’ fears, and get them behind the runway plans, the airlines are proposing a special-purpose company, known as a “Buildco”, to deliver the project; Heathrow and the airlines would buy stakes in it. The government is trying to reassure the airlines by slightly increasing the CAA’s remit and powers.
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Airlines plot to hijack Heathrow runway

Carriers see chance to run project, amid fears over high costs

By Jon Ungoed-Thomas
June 3 2018 (The Sunday Times).

British Airways and other airlines are plotting to take over building the proposed third runway at Heathrow from the airport’s owner, because of fears that the costs will spiral to more than £20bn.

The airlines are concerned the rules governing Heathrow may not be sufficient to control the costs of expansion. Passenger charges and investor returns are based on the total value of the west London airport’s mountain of assets — from runways to car parks — which, it is claimed, gives little incentive to keep spending down. An investigation by The Sunday Times in March highlighted widespread concerns over bloated spending.

Willie Walsh, chief executive of International Airlines Group (IAG), BA’s parent company, told a parliamentary inquiry in February he had “zero” confidence that Heathrow’s operating company would deliver the project on time and on budget. He said it would be foolish to sign a “blank cheque”.

MPs are due to vote in the next few weeks on the expansion plans, which were backed by the government in October 2016.

The Sunday Times has seen a document submitted to the Civil Aviation Authority by the International Air Transport Association and the Heathrow Airline Operators Committee. It proposes the formation of a special-purpose company, known as a buildco, to deliver the project.

“The airline community is interested in the idea of establishing a separate company (a ‘Buildco’) which would be responsible for the actual construction and delivery of the [third runway] expansion programme,” states the document.

“[Heathrow], the airlines and any interested third parties would effectively buy a stake in the buildco.”

IAG said a similar model has been used to construct the £4bn Thames Tideway sewer in London. The airlines believe a buildco would ensure greater transparency and help to keep costs down.
A separate document submitted by IAG also says a special-purpose company should be considered as an option. It states that it could be sold to the airport or a third party once the works are completed. Heathrow hopes the third runway will be built by 2025.

Heathrow estimates that the bill for building the third runway will be about £14bn, but there are fears the projected cost of the runway and related transport links could be overshot dramatically. The government’s Airports Commission put infrastructure costs for the scheme at about £4bn, while Transport for London has said they could exceed £15bn.

Heathrow said it was open to ideas, including the proposed buildco: “We are willing to work with anyone who shares our values and who is committed to delivering on the promises we have made.”
It added: “As part of the robust regulatory process at Heathrow, airlines must approve every pound of our capital investment.”

The hotel tycoon Surinder Arora has also devised a plan to build the runway, winning interest from BA and Virgin.

Airlines (IATA, AOC)

“In order to progress the debate on third party engagement in a practical and pragmatic way, the airline community wishes to propose an alternative approach that we believe is worthy of detailed consideration alongside the exiting options. Clearly the details will need to be worked out with the CAA and with HAL, and we look forward to engaging with both parties to do that.

“The airline community is interested in the idea of establishing of a separate company (a ‘Buildco’) which would be responsible for the actual construction and delivery of the 3R expansion programme. HAL, the airlines and any interested third parties, would effectively buy a stake in the Buildco. The Buildco itself would then undertake the 3R expansion programme for a fixed price and scope.

“When assets were completed by Buildco, they could be sold to HAL for the fixed price, or if all parties agreed and the asset was separable (e.g. say a Terminal), the asset could either be sold to a third party, or sold to HAL, with rights to operate the terminal bought by a third party for a fixed term. This latter approach could lower the overall price of the scheme (aiding affordability and financability) and give the CAA a valuable benchmark on the true cost of operating an airport asset at Heathrow.”

The Government has put more pressure on Heathrow to limit its expansion costs after broadening powers which enable the Civil Aviation Authority (CAA), the aviation industry regulator, to more closely scrutinise the airport’s plans. The airlines, and IAG in particular, are deeply sceptical about the cost of the 3rd runway, and how expensive it will be for them. They have no faith in Heathrow to be able to build its runway etc, for a reasonable price. Transport Secretary Chris Grayling said the CAA would now be able to seek views on the expansion of Heathrow from a wider range of stakeholders, and would also be able to benchmark the price of the project against international comparisons. The CAA’s oversight powers will see the regulator able to get the views of airlines which don’t yet operate from Heathrow, but hope to do so in future. Heathrow has already tried to make £2.5 billion savings in its plans, as the airlines refuse to stomach the £17 billion price. Willie Walsh (CEO of IAG) said: “Heathrow is a monopoly with a history of gold-plating facilities and very high airport charges …. Benchmarking its cost proposals against similar schemes is critical and very welcome. It is imperative that Heathrow provides a full, detailed cost breakdown for expansion before Parliament votes on it this summer.”

British Airways’ owner IAG (Willie Walsh) has called on government to break up Heathrow’s “monopoly” of infrastructure, suggesting to the CAA that other companies could run the different terminals to create competition and cheaper flights for consumers. IAG, which is Heathrow’s largest customer, said the airport’s planned expansion could allow independent firms to create and run new terminals more effectively than Heathrow’s current owners, with lower costs to airlines – and better cost control. IAG is desperate for charges by Heathrow not to rise, to pay for its runway etc. Walsh said: “Heathrow’s had it too good for too long and the government must confirm the CAA’s powers to introduce this type of competition. … This would cut costs, diversify funding and ensure developments are completed on time, leading to a win-win for customers.” BA runs a terminal at JFK airport in New York and there are European examples at Frankfurt and Munich airports. Heathrow has a real problem, becoming ever more clear, with funding for its expansion plans. Chris Grayling has said Heathrow landing charges (already some of the world’s highest) “should be kept as close as possible to current levels.” A vote is due to be held this summer in the Commons on the Airports National Policy Statement (NPS).

Sunday Times commentary on Heathrow: the cash machine with an airport attached

March 18, 2018

The Sunday Times reports that under a complex (perverse) incentive system, Heathrow is encouraged to spend as much as it can on developing the site. Heathrow’s investors earn returns based on the size of its “regulatory asset base” (RAB), under a formula set by the CAA. So the more the airport spends, the more its owners can earn. It gives an example of £74,000 to cut down 3 trees, which is at least 20 times the normal price. These costs of developing the airport are recouped through passenger charges, and also set off against UK tax. The Sunday Times questions the efficiency, governance and transparency of the management of Heathrow. It says the airport is demanding an insurance policy against the risk that the project goes wrong, and wants the CAA to ensure it will be compensated by airlines and passengers if there are unanticipated difficulties (eg. construction delays, or lower than anticipated passenger numbers or revenue).Scrutiny of Heathrow’s spending has been inadequate, there is no audit of the RAB, to show how the figure of £15.8bn for the expansion project is calculated, and Heathrow has not provided a detailed cost breakdown for the runway plans. There are past examples of excessive costs eg. the T2 car park at £61,000 per place, or a smoking shelter at T2 that which was priced at £450,000, but finally cost £1m.